Some franchisees' struggles to turn a profit forced them to close, reducing Quiznos's royalty income.
But he labeled other endorsement fees from Upper Deck, Electronic Arts and Rolex 100% royalty income.
The IRS argued the personal services point, downplaying the royalty income based on his image.
Since the royalty income was effectively connected with a U.S. trade or business, the IRS got its slice.
The royalty income from Rolex was 50% U.S.-source income not effectively connected with a U.S. trade or business.
The royalty income from Upper Deck was 92% U.S.-source income not effectively connected with a U.S. trade or business.
Thus, while U.S. tax on the three years of royalty income is accelerated, the total amount of taxes is not increased.
FORBES: Corporations Can Prepay Royalties To Access Foreign Cash
For financial reporting purposes the royalty income and taxes generally are reported over the three-year period as if the royalties had been received each year.
FORBES: Corporations Can Prepay Royalties To Access Foreign Cash
And as a result, the court agreed with Goosen that income received from those contracts could be classified as half royalty income and half personal services income.
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Filing non-resident U.S. tax returns, Goosen allocated 50% of his endorsement fees and bonuses from Acushnet, TaylorMade and Izod to personal services, classifying the other 50% as royalty income.
The case turned on whether the endorsement earnings were royalty income based on his image or personal services income based on his performance on the golf course .
The amount of the advance royalty payment generally is subject to U.S. tax in the year received (but there would be no further taxable royalty income in years 2 and 3).
FORBES: Corporations Can Prepay Royalties To Access Foreign Cash
Generally, royalty income which is paid for the right to use intangible property (such as a likeness) is sourced where the property is used or is granted the privilege of being used.
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Brian Henry, a spokesman for Medtronic, says the company applies that policy to all its collaborating surgeons, thereby eliminating the temptation for them to do more surgeries to earn more royalty income.
Pfizer (nyse: PFE - news - people ) to counteract the effect of the body's overproduction of growth hormones, that has been generating more than 90% of the school's royalty income.
While Goosen and the IRS both agreed that personal services income, tournament bonuses and ranking bonuses should be considered US sourced, they disagreed as to what portion of the royalty income from endorsement fees should be considered US sourced.
FORBES: Tax Court to Athletes: Image Isn't Everything But It's At Least 50%
U.S.-source income generally includes pay for performances, endorsements, merchandise sales, and royalty or other income closely related to the event.
This includes compensation for performances, endorsements, the sale of merchandise, and royalty or other income closely related to the event.
What is considered U.S.-source can be debated but includes pay for performances, endorsements, merchandise sales, and royalty or other income closely related to the event.
Add royalty and professional services income and the San Jose exposure may approach 30%, says regional economist Ross DeVol at the institute.
An upgraded version Erbitux is also in the works that would have the same royalty split but would provide additional income to a purchaser.
U.S. tax law treats royalty costs as mere deductions, while foreign income taxes count as dollar-for-dollar credits against U.S. income tax.
For those who like the details, here are the latest fiscal terms: an 11% to 15% overriding tax-deductible royalty, with a 50% petroleum tax on the income.
States with big energy production, like Louisiana and Oklahoma, also have another reform option: replacing the income tax with revenues from oil and gas extraction taxes, drilling leases and royalty payments.
In addition, they have written statutes and regulations that require taxpayers to prove not only that foreign levies are income taxes but also that no amount of the payment is a fee (such as a royalty) for a specific economic benefit.
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